E4-4 Altex Inc. manufactures two products: car wheels and truck wheels. To determine the amount of overhead to assign to each product line, the controller, Robert Hermann, has developed the following information.

Car Truck

Estimated wheels produced

40,000

10,000

Direct labor hours per wheel

1

3

Total estimated overhead costs for the two product lines are $770,000.

Instructions

(a) Compute the overhead cost assigned to the car wheels and truck wheels, assuming that direct labor hours is used to allocate overhead costs.

(b) Hermann is not satisfied with the traditional method of allocating overhead because he believes that most of the overhead costs relate to the truck wheel product line be- cause of its complexity. He therefore develops the following three activity cost pools and related cost drivers to better understand these costs.

Activity Cost Pools

Expected Use of

Cost Drivers

Estimated Overhead

Costs

Setting up machines

1,000 setups

$220,000

Assembling

70,000 labor hours

280,000

Inspection

1,200 inspections

270,000

Compute the activity-based overhead rates for these three cost pools.

(c) Compute the cost that is assigned to the car wheels and truck wheels product lines using an activity-based costing system, given the following information.

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